Saturday, March 29, 2008

Barack Obama's Achilles Heel

Barack Obama appears likely to be the Democratic nominee for President in 2008. He also looks likely to lose the general election to John McCain. As I will show below, the evidence from a number of primary elections held thus far suggests that Obama's support is concentrated in urban areas and that his performance in suburban areas and small towns, where a large majority of general election votes are cast, is decidedly weak. His weak showing outside of urban areas may play a critical role in several crucial swing states that may well decide the 2008 election. Because Democratic candidates for President in 2000 and 2004 lost these elections as a result of their weak performance outside of urban core areas, it seems curious that Obama's potentially fatal electoral weakness has received as little attention as it has from Democratic party leaders and from media analysts.

The eight states analyzed are colored in grey in the map below:

The eight states include two states that lean Democratic (Maryland and Wisconsin), three potential swing states (Ohio, Missouri and Tennessee) and three states that lean Republican (Alabama, Louisiana and Texas). Maryland and Wisconsin voted Democratic in both 2000 and 2004; George W. Bush carried the remainder of these states in both elections and these electoral votes provided Bush with his margin of victory in both elections.

Barack Obama won the overall vote in these eight states by a slender margin over Hillary Clinton:

However, his share of the vote in the major urban centers of these eight states was lopsided:

At the same time, Hillary Clinton's percentage share of the primary vote in these eight states outside of these urban areas was significantly in her favor:

Obama's problem is that most voters in these eight states live outside of these core urban areas:

More than two-thirds of Deomcratic voters in these eight states live outside of these major urban areas. The percentage of general election voters located outside of these urban core areas is even more lopsided:

Nearly three of four voters in the 2004 general election in these eight states were located outside of these urban core areas. George W. Bush's margin over John Kerry outside of the urban core areas of these eight states was decisive:

Note that Kerry's margin of victory over Bush in the urban core areas of these eight states was 57.3% to 42.7%.

Obama's support outside of urban core areas in three potentially crucial swing states appears especially weak. In Missouri, a state which typically casts its electoral votes for the winning candidate (and which did so in 2004 and 2000), his support outside of core urban areas among Democratic primary voters barely nudged 40%:

John Kerry lost these areas of the state by a 61.3%-38.7% margin in 2004, a showing that cost him Missouri's 11 electoral votes.

Obama's support in these same areas of Ohio was even weaker:

Note that Bush carried these areas of Ohio by a more narrow 54.7%-45.3% margin in 2004. However, this narrow margin was enough to swing the state's 20 electoral votes (and the election) narrowly in his favor.

Obama was crushed by Clinton in Tennessee outside of that state's urban core areas:

Bush defeated Al Gore in these areas of Gore's home state by a 55.5%-44.5% margin in 2000. This showing overcame Gore's 57.9%-42.1% advantage in the state's urban core areas and narrowly delivered the state (and the election) to Bush.

In contrast to the struggles of the 2000 and 2004 Democratic candidates in these states, Bill Clinton won all three of these swing states, and the election, in both 1992 and 1996.

U.S. Presidential elections are ultimately decided in the suburbs and smaller cities. While urban upper-middle class liberal Whites and urban Blacks are overwhelming supporting Obama in the Democratic primaries, Obama's showing among more moderate suburban and small town voters thus far appears tepid. This trend is likely to continue in another swing state, Pennsylvania, that will cast its votes on April 22nd. This suggests that Obama faces an uphill climb to win the presidency if he does in fact win the Democratic party Presidential nomination. It is astonishing to this writer that a candidate with such a fundamental weakness as Obama's is not facing more scrutiny from Democratic party leaders who continue to ebb towards his campaign.


Below is a table showing the cities (actually the counties in which these cities are located) used in the analysis.

The analysis made use of election data found in Dave Leip's incomparable U.S. Presidential election web site.

Wednesday, March 12, 2008

The Glengarry Leads

In the cinema classic "Glengarry Glen Ross" real estate salesmen Jack Lemmon, Ed Harris and Alan Arkin beg office manager Kevin Spacey for access to the "Glengarry leads" the magical names and phone numbers containing potentially good prospects they believe can save them from financial disaster. Please imagine that a sequel to this film, "Glengarry Glen Ross 2" has just been released but that Fed Chairman Ben Bernanke has taken the place in Kevin Spacey in this updated version and that the CEO's of various Wall Street investment banks are filling in for Lemmon, Harris and Arkin. What's more, while Kevin Spacey refuses to give out the leads unless he is paid a generous bribe, no bribe is necessary in "Glengarry Glen Ross 2" for Ben Spacey to dole out the Glengarry leads in generous measure to the desparate investment bank CEO's.

The Glengarry leads are being doled out in the ongoing credit-cruch saga via the "term securities lending facility" announced before the start of Tuesday's trading in the U.S. As you are probably by now aware, the TSLF is a $200 billion line of credit in the form of U.S. Treasuries that the Fed will lend to Wall Street banks for up to 28 days. The "catch" is that the securities offered as collateral by the banks must be AAA/Aaa rated. Yes, the hard-ass Fed is putting their little foot down by insisting that only the banks best securities can be used as collateral for the banks to receive the Fed's oxygen. However, as Paul Krugman points out, the rating agencies have yet to cut the gilt ratings on the MBS securities issued by the banks even though virtually all of these securities are experiencing major losses. How thoughtful of the rating agencies!

In other words the Fed are going to exchange their golden Glengarry leads (otherwise known as U.S. treasuries) for Florida swampland (otherwise known as MBS paper). It will not take a genius to figure out that the banks are going to flood the Fed with the crap-de-la-crap they now hold. While this scheme may help ease lending conditions on the margin, the TSLF will unfortunately be unable to turn garbage into gold. As residential real estate continues to fall in value in the U.S., the value of this paper will continue to fall and, ultimately, this scheme will fail because borrowers will be unwilling or unable to borrow money to buy over-priced real estate assets regardless of how available or how cheap money becomes. The banks will ultimately have to dine on their crap.

This situation brings back memories of Japan in the mid-90's. The Japanese banks were then getting stuffed to their gills with non-performing loans and, with the problem growing bigger and bigger by the day, the financial authorities created an entity to allow the banks to get these NPL's off of their balance sheets for up to five years. The idea was that the real estate market would recover and the loans would nurse themselves back to health in the interim. This didn't happen and eventually the problem loans went back on the bank's balance sheets, in generally worse shape than they went in.

The same will happen here with the Wall Street bank's bad paper. What amuses this writer is that one sees over and over again in the western press how the Wall Street banks and U.S. financial authorities are dealing with this crisis far, far better than their Japanese counterparts did in the 1990's. Presumably, such wisdom (emmanating as it is from the unquestioned superiority of the U.S./Anglo financial model) will bring a "quick" resolution to the crisis as the banks "quickly recognize" their losses and the U.S. financial authorities act "quickly" to "eliminate" systemic risk. As usual ideology triumphs over reality; in the short run anyways. One can easily imagine, therefore, that the market's surge in response to Ben Spacey's generousity in passing out the Glengarry leads will be shortlived.

P.S. Michael Mandel offers the quote-of-the-day in his commentary on the TSLF. I repeat it here with the barest minimum of comment:

Bernanke's ability to pull new policy instruments out of his hat may throw a bit of fear into investors who are betting on a downturn. Just when the Fed looks boxed in, he comes up with a new way to pump out liquidity - while preserving his real silver bullets, the rate cuts."

Ah, yes, those silver bullets. "Hails of derisive laughter, Bruce!"

Tuesday, March 11, 2008

Tamino's Bet - Month Two

As I noted last month, Tamino has made a "bet" that global temperatures would continue to increase between now and 2015 in line with the 1975 to 2007 trend. The conditions of the bet for the year 2008 are as follows:

1. If the average global temperature anomaly, as measured by NASA GISS, equals or exceeds .7350 degrees Celsius, the "still-warming" side will receive one point.
2. If the average global temperature anomaly, as measured by NASA GISS, is less than or equal to .4035 degrees Celsius, the "not-warming" side will receive one point.
3. If the average global temperature anomaly, as measured by NASA GISS, falls between these two figures, both sides will receive zero points in 2008.

The "winner" of the bet will be the first side to receive two points during the 2008 to 2015 period. Since the threshold for the "not-warming" side will rise slowly throughout the period (at the same rate as the trend line in the 1975 to 2007 period), the probability that zero points will be awarded in a given calendar year will decrease during the course of the bet.

As readers of this blog may have seen in other posts in this blog, this writer believes that the earth has recently entered a cooling cycle that will last for, approximately, the next 30 years. As a result, I believe that Tamino is destined to "lose" his bet.

In fact, the "not-warming" side is off to a "hot" start just two months into this bet. The February NASA GISS figures are just in and they show a global anomaly of .26 degrees for the month. Since the January anomaly figure was .12 degrees, the average for the year thus far is .19 degrees or well below the .4035 degree threshold for 2008. It is interesting to note that this .19 degree average for a two month period is the lowest since February-March of 1994. In order for the "not-warming" side to win a point in 2008, the average anomaly for the reminder of the year would need to be below .446 degrees. Since the average anomaly for a 10-month period has exceeded this figure for every month since September 2001, it would still seem unlikely that the "not-warming" side will win the point in 2008. Unless, of course, "something" has changed. Stay tuned!

Saturday, March 8, 2008

Climate Modeling and Economic Development

Once in a long while I see something written on the internet truly thoughtful and insightful. Even more rarely, such thought and insight appears in a blog discussion. The following comment on climate modeling, by a gentleman named Ajit from Sunnyvale California, appeared on the New York Times website on a blog discussion on the recent climate change skeptics conference held in New York (I have highlighted what I believe to be his most salient comment):

Back in the early 90s, when I was a fresh PhD looking for a new area for post-doc research, I checked out the area of climate modeling. I saw a lack of high-caliber research, particularly in the experimental areas (e.g., cloud formation). Many climate modelers appeared to me at that time to underplay the uncertainties in their models. I was not impressed. The final straw was attending a talk by Stephen Schneider who had just arrived at Stanford as a faculty member. The talk sounded to me like a political speech with little discussion of the technical aspects, even though he was addressing a group of researchers.

Things appear to have come a long way in the last 15 years, and everyone feels sufficiently qualified to make sweeping statements about climate change that should make the average model developer shudder. The accuracy of climate models is determined not by doing experiments, but by taking a poll amongst climate scientists and modelers.

For example, I watched David Letterman having a discussion on climate change on his show with Tom Friedman with the former crediting Al Gore with teaching him all about it! It was comedy at a level that John Stewart would appreciate!

What I find strange is that there is no discussion is to whether the technical problem of climate modeling (as opposed to weather modeling) is solvable. I do not mean whether we have the necessary computing power. I mean whether there are at all any unique solutions to the complex and highly coupled set of partial differential equations that describe the thermo-fluid transport process governing climate behavior.

To give an example, consider the problem of free convection of gas between two concentric spheres with two different constant temperatures imposed on the sphere surfaces. The flow patterns that develop depend on the initial guess values one assigns to the gas velocity and temperature, i.e., the solutions are non-unique. We are talking about simple laminar flow here, not turbulent flow with chaotic phenomenon that occurs in the atmosphere and makes the solution even less certain. It is just the nature of the mathematical problem. Once can draw an analogy between this flow and that of the atmosphere. I fear that we have little chance of making long-term accurate projections if this simple problem has non-unique solutions.

By contrast, weather modeling for predictions over a week or two are much more accurate because the models are data-driven and the uncertainties don’t accumulate over long periods. Even then, try doing the experiment of comparing two-week predictions of temperature and precipitations in your area with actual data.

Of course, climate modelers have a vested interest in not talking about such issues. But we can start by comparing the predictions of today’s temperature and flow fields with those predicted by models 15-20 years ago, and continue to do so in the future.

The increase of greenhouse gases point to a warming trend. However, we are not sure what the nature of the feedback (positive or negative) that is introduced. Additionally, the range of average temperature variations we are shown as proof of global warming is comparable to the magnitude of the measurement noise. Basic scientific practice dictates that such data not be used to come to major conclusions that drive public policy.

In other words, I don’t think I will feel comfortable tens of millions of poor in India and China that we have to go slow in improving their lot so that a thousand Pacific Islanders are not displaced. I would also go slow in extrapolating a rise of a few centimeters of local sea levels to a rise of meters at key population areas for the convenience of fear-mongering.

The writer addresses the most important issue in climate modeling - modeling the climate is not the same as predicting the climate in 100 years. Systems such as the earth's climate are complex, that is, the number of possible outcomes is so divergent and the probabilities of these individual outcomes so small that that predicting which path the general climate will take over the next 100 years is simply heroic.

Below is a response by another reader to the comments of Ajit. I will save my comments for later. Enjoy the unfiltered thought by someone calling themselves mhoney:

dear Ajit in Sunnyvale

Unfortunately, it is the millions of poor in India and china who will suffer first and most from global warming - you have that backwards. Have you not noticed the extent that Beijing is going through to try to get their air to acceptable standards for the Olympics? And we’re not even talking LA standards - it is way worse than that!

It is not a question of progress versus no progress. The new direction technology takes needs to include these millions of poor - we cannot leave them with belching smokestacks and fish-free waters. They are ‘developing’ using 20th century technology - not the techonology of our grandparents, so the scale is not comparable, either. To say that a few centimeters of rising waters in a pacific island should be contrasted to with raising millions of poor out of poverty through ‘progress’ certainly ignores the price of that ‘progress’ the poor are already paying. The ‘third world’ should be first in combating global warming - they are already suffering the most.

Oh, really? I remember the first time I went to China in 1992 as part of a party from Japan that were guests of the provincial government of Fujian. One of the places we went to was a fairly remote city in the province's interior. I remember leaving my hotel one evening to stroll around the city. People stared at me as if I were an apparition - it was as if they had never before seen a white face. And perhaps, I thought, maybe they hadn't and that I was truly that first white face. I could see that people weren't starving, but I could also see that their bellies weren't full. But I could feel a furious energy in the people, a furious desire to improve their lot.

This person has the temerity to say that the millions of poor in China and India are the first ones to suffer from global warming. What on earth is this person talking about? Yes, these people are breathing foul air. It's not perfect, but it's a whole lot better than the world they were living in when their air was pristine. While this person makes the good point that these people should benefit from emerging energy generating technologies, the unstated premise here is that poor people in countries like India and China should just be patient and wait for the developed world to bestow upon them advanced technologies which will, naturally, fit perfectly into their own developing economies. Trust us, we have everyone's best interests at heart here.

Unfortunately, the developed world never gives anything away for free. Countries that have control over their destiny are countries who have control over their economies. That is, their economies are structured to be compatable with their culture and their trade and inward foreign investment relationships with other countries are structured with their own national interests in mind.

These two comments sum up the most important issues regarding climate change. Predictions of potential disaster are based on models that cannot predict the future no matter how much computational power the computers have and no matter how accurately the physical phenomenon being simulated are modeled. Belief in the outcome of these models is an act of faith. Unfortunately, those that take the model's results as an act of faith then use these results to make policy prescriptions with potential impact on the lives of everyone. That the vast majority of people making such policy prescriptions reside in developed countries should suggest that such "solutions" have the best interests of the developed world at heart.

Thursday, March 6, 2008

Japan and Inward Foreign Investment

Michiyo Nakamoto discusses Japan's apparent willingness to erect new barriers to foreign investment in the FT's March 2nd issue. Nakamoto remarks on what may reasonably be described as a landmark speech given on January 24th by MITI's top bureaucrat Takao Kitabata. Kitabata's speech, which was widely reported in both the domestic Japanese press as well as the international press, was significant in that it signalled a potential shift in Japan's attitude towards foreign investment. Kitabata suggested that companies should have the right to choose their shareholders (an apparent reference to the traditional system of publically traded firms cementing business relationships through cross-shareholdings) and described shareholders as being '"fickle, irresponsible and greedy."' Although Kitabata was criticized and made to apologize for the speech by his political boss, MITI Minister Akira Amari, it would not be unreasonable to interpret his criticism of his "underling" for having said too much rather than having said something factually incorrect. As an example of foreign reaction to the speech, Nakamoto quotes a "European hedge fund director" as questioning "`"Do I want to be here [in Japan]? [Kitabata's] comments just pushed people over the edge who were already near the edge."

My goodness! The fear of having speculative hot money yanked out of the Japanese market must be causing sleepless nights for Japanese bureaucrats and central bankers. Not. Even amobeas are probably aware that Japan runs a massive current account surplus that has persisted for most of the past quarter century. It has been frequently noted by international trade economists that a country running a current account surplus must necessarily have an excess of investment capital to investment (a good explanation that this is the case can be found here). Simply put, Japan does not "need" foreign investment. So why has Japan opened its doors to foreign investment over the past 15 years? Because Japan needs foreign investment.

This apparent contradiction is resolved when one understands that Japan has welcomed foreign investment in order to reform sectors of its economy (most importantly real estate) nessessary for it to achieve a new and higher level of economic prosperity. It also suggests that the willingness of Japan to accept foreign investment is predicated ultimately on that investment advancing Japan's economic development. That few foreign investors understand such concepts is well understood by Japanese policymakers with a long institutional memory of rapacious westerners happy to spout economic theories of mutual benefit through open trade while looting and pillaging lesser developed countries. In this sense, Kitabata's comments are a none-too-veiled threat to such foreign investors that they and their money may no longer be welcome.

Nakamoto goes on to quote an HSBC analyst as saying that Japan has the choice to either '"become a more U.S. style capitalist economy . . . . [or] put up the barricades, block foreign investment and immigration [and] allow companies to be more paternalistic"'. What balderdash. That western analysts can't conceive of successful economic models different from their own simply means they are utterly unprepared for the world of the 21st century where alternative models of economic development in countries as diverse as Japan, China, Korea, India, Russia and Brazil will be shown in lesser and greater ways to offer workable models of economic development that contrast with U.S. style capitalism.

Foreign investment that improves the Japanese society and economy is now and will continue in the future to be welcomed. Such investment adding to Japan's national well-being will in turn be allowed to earn for its investors a return sufficient to attract such inward investment. Such investment will necessarily be a two-way street and will be managed as such without regard to western sentiment and economic theories.

Saturday, March 1, 2008

Flawed Perceptions of Risk

Paul Klemperer, an Oxford University economist, uses a curious chain of logic to argue in the Financial Times that uncertainty about the extent of climate change should led us to be more, not less, worried about its potential risks. Klemperer uses the following analogy to turn the argument by skeptics that climate change forecasts are speculative and unreliable on its head and argue that uncertainty about climate change forecasts should make us more and not less concerned about global warming:

"If, like many of my neighbours in Oxford, you believe that new building exacerbates flooding, how would you feel if models that predicted bad news were discredited?"

I have never been to Oxford (and it's not high on my list of must-see places), so I must assume that Oxford faces a flooding threat such that, in the belief of many people living there, constructing new buildings in Oxford increases the risk of flooding.

Klemperer answers this question with the following statement:

"It depends. If the original models were biased, your best guess of the height of future floods is now lower. But if the models merely underestimated the uncertainty, the range of plausible outcomes is now greater, so flood defences would need to be higher for us to feel safe."

Klemperer is therefore assuming there are two possible outcomes:

1. The mean value of the perceived risk in fact lower than previously assumed.
2. The shape of the distribution of possible perceived outcomes is in fact flatter, that is, perceived probabilities of both lesser and greater flooding threat than before have in fact become higher.

Klemperer concludes his argument by stating that:

"Likewise, if our understanding of climate systems is flawed, our best guess about the dangers we face may be less pessimistic, but extreme outcomes are more likely."

Now, suppose we have a single measurement estimating something, for example the current population of New York City. It is necessarily true that the mean value of the estimation is the same as this one value and, since it is the only value, there is no variation around that value. Suppose that we then get a second measurement of New York's current population and that this second measurement is smaller than the first. Then, no matter how much smaller the second measure is from the first, the standard deviation around the average of the two is such that, given the revised view of the world based on the updated information, the distribution of possible current populations for New York City includes values greater than the first measurement. As this simple example points out, Klemperer is in fact arguing that both of the above possible outcomes are true and therefore, by necessity, any additional information on the risks of global warming suggesting its potential risks are less than currently thought actually increases our perception of the probability that an extreme outcome could in fact take place.

Klemperer is essentially assuming that new information is no more likely to be true than existing information. But if new information is no likely to be true than existing information and if the addition of that information necessarily increases the perception of increased risk regardless of whether the new information confirms or challenges the existing information, why bother collecting further information?

This exposes the fatal flaw in Klemperer's argument. Science is concerned with developing hypotheses and collecting data to confirm or refute these hypotheses. Assuming, as Klemperer does, that any additional information by definition confirms the presence of increased risk even if the additional information challenges that belief constitutes a belief in the veracity of the original information more characteristic of faith than science.